12 Jan 11
Selling short started in commodities markets when farmers owned goods and wanted (actually needed) a fixed price when the sell the crop. A fixed price often helped them get loans and prevented them from taking the risk of market fluctuation in price and then having to default.
Shorting allows fixed prices. (Airlines sell tickets now and price of gasoline fluctuates, municipalities start projects that take years and cost or raw materials change). They should use futures markets to get certainty.
Are certain uses irresponsible? Of course but you could say the same thing about fire and knives and alcohol and a whole bunch of things that have huge social benefits but are also regulared. The current climate where we simply ban things (or even threaten to ban things) without understanding the issues is problematic and continues to cause bigger problems than it prevents.
12 Jan 11
Originally posted by joneschrIf everybody loaned their stock shares to short sellers what would happen to the stock price?
But you do own it - and that's exactly the difference between naked shorting and shorting.
With normal shorts you do own the stock you sell. You acquire the stock by getting it from someone who is willing to loan it to you. It's then yours, with a caviat that you agree to give an equivalent amount back eventually, but it's yours. And you can sell it. ...[text shortened]... derstand why you'd throw the baby out with the bathwater and get rid of all shorts.
12 Jan 11
Originally posted by quackquackShorting allows fixed prices? How, by fixing the market?
Selling short started in commodities markets when farmers owned goods and wanted (actually needed) a fixed price when the sell the crop. A fixed price often helped them get loans and prevented them from taking the risk of market fluctuation in price and then having to default.
Shorting allows fixed prices. (Airlines sell tickets now and price of ga ...[text shortened]... understanding the issues is problematic and continues to cause bigger problems than it prevents.
When you say fix prices do you mean stabilize prices? If you do I will challenge that.
12 Jan 11
2 edits
Originally posted by Metal BrainThat's a separate issue entirely. That's an argument why short selling itself is bad. Not an argument on how to prevent naked shorting.
If everybody loaned their stock shares to short sellers what would happen to the stock price?
But I'll bite - it would create a temporary downward pressure on the stock price, that in time, would correct itself -- because -- it did nothing to affect the actual value of the stock - only the price.
But lets be realistic -- when do you ever see shorts as such as significant percentage of the float -- and when the short is a large percentage of the float how often has it been because the company is in fact in trouble...
12 Jan 11
Originally posted by joneschrI have already acknowledged that short selling cannot be prevented entirely. I stated it should be minimized.
That's a separate issue entirely. That's an argument why short selling itself is bad. Not an argument on how to prevent naked shorting.
But I'll bite - it would create a temporary downward pressure on the stock price, that in time, would correct itself -- because -- it did nothing to affect the actual value of the sock - only the price.
Temporary downward pressure is a form of market manipulation. Sure it will correct in "time" but how much time is why people panic sell. Try telling that to the people who are selling.
Face it, time makes all the difference in the world. Not all investors are patient or even long term investors, and if things are bad enough it will spread to the (normally) long term investors if they think the trend is long term. That is what happens when the stock market crashes.
Actual price is a matter of opinion. The only actual price is the market price at that time. Whether a stock price is undervalued or overvalued doesn't matter unless you are buying or selling. If all investors knew a stock price's true value, markets would not fluctuate. Remember, perceived future earnings often determine how much an investor will pay for the stock share. That is guesswork to some extent.
12 Jan 11
Pump and dump is market manipulation too. If you can manipulate stock price by short selling and then buying at the lower price -- you can do the same thing by buying and creating an upward trend and then selling.
Market manipulation is illegal. I don't see how that's a good argument that you should remove the tools of trading in the market.
12 Jan 11
Originally posted by joneschrAll of those things are illegal. That is the whole point, they are illegal for a reason.
Pump and dump is market manipulation too. If you can manipulate stock price by short selling and then buying at the lower price -- you can do the same thing by buying and creating an upward trend and then selling.
Market manipulation is illegal. I don't see how that's a good argument that you should remove the tools of trading in the market.
Insider trading is illegal and it should be. You will never eliminate it, but that is no reason to make it legal. All you can do is minimize it.
12 Jan 11
5 edits
Originally posted by Metal BrainBut you do realize that there are legitimate reasons to short sell... it doesn't exist for market manipulation alone...
All of those things are illegal. That is the whole point, they are illegal for a reason.
Insider trading is illegal and it should be. You will never eliminate it, but that is no reason to make it legal. All you can do is minimize it.
I'm all in favor of regulating and trying to prevent market manipulation. It's already illegal. But that doesn't mean you should ban short selling entirely.
Maybe you already acknowledged this, I'm not sure. It sounds like maybe you're arguing that the status quo is OK, since market manipulation is already illegal, naked short selling is also banned, and normal short selling is sill legal.
What exactly would you like to change?
13 Jan 11
Originally posted by joneschrEven the SEC halted short selling of financials.
But you do realize that there are legitimate reasons to short sell... it doesn't exist for market manipulation alone...
I'm all in favor of regulating and trying to prevent market manipulation. It's already illegal. But that doesn't mean you should ban short selling entirely.
Maybe you already acknowledged this, I'm not sure. It sounds like maybe y ...[text shortened]... banned, and normal short selling is sill legal.
What exactly would you like to change?
http://www.sec.gov/news/press/2008/2008-211.htm
Why? To protect investors and markets it says.
Was the SEC wrong in doing that?
13 Jan 11
Originally posted by Metal BrainShort selling represents a contract between individuals. People in a free society should be able to sign the widest possible variety of contracts without interference since such contracts are founded on the principle of mutual benefit.
Even the SEC halted short selling of financials.
http://www.sec.gov/news/press/2008/2008-211.htm
Why? To protect investors and markets it says.
Was the SEC wrong in doing that?
Provided the contract is fully understood by both parties, what do you find wrong with short selling (or naked short selling) -- other than in temporary cases such as this?
13 Jan 11
Originally posted by spruce112358So you think cartels are OK?
Short selling represents a contract between individuals. People in a free society should be able to sign the widest possible variety of contracts without interference since such contracts are founded on the principle of mutual benefit.
Provided the contract is fully understood by both parties, what do you find wrong with short selling (or naked short selling) -- other than in temporary cases such as this?